US Dollar Monthly Exchange Rates Forecast - December 2024

The outcome of the US election, with President Trump winning the presidency and Republicans taking control of Congress, has significantly boosted the trade-weighted US dollar to near-record highs. Expectations of fiscal stimulus, resilient inflation, and a strong labor market—highlighted by November payroll gains of around 227,000—support further dollar strength into 2025. While some of Trump's appointments are controversial, his economic team's focus on spending and tax cuts has been welcomed by capital markets. Signals suggest that campaign tariff threats were negotiating tactics, reinforcing optimism for equities and the dollar, with fewer rate cuts expected than previously signaled by the Federal Reserve.

The Canadian dollar has struggled in Q4, declining 3.6% against the US dollar over the past two months, with additional pressure stemming from US political developments. President-elect Trump’s threat to impose a 25% tariff on Canadian imports has heightened concerns, though such tariffs appear unlikely given Canada’s critical role in US energy supplies and integrated supply chains. The USD/CAD reached a high of nearly 1.4180, its strongest since the pandemic, following these remarks. While these threats are widely seen as negotiation tactics, they introduce uncertainty and volatility, particularly as Canada exports nearly 20% of its GDP to the US The Bank of Canada’s upcoming meeting on December 11, with an 80% chance of a 50-basis point rate cut priced in, further weighs on the CAD. A USD/CAD target of 1.45 for the first half of 2025 reflects ongoing challenges, though potential compromises in trade talks could stabilize the currency.

The eurozone economy remains fragile, with weak growth and Germany failing to achieve two consecutive quarters of expansion in two years. The region faces challenges competing with the US, defending against Russia, and managing economic competition with China. Early winter weather and reduced wind energy have led to increased gas consumption, driving inventories down and prices up to more than double late-February levels. The ECB meets on December 12, and while a 50-basis-point cut was considered after poor November PMI data, the rise in CPI and euro depreciation suggest a 25-basis-point cut is more likely. Potential US tariffs, targeting Germany and Italy's trade surpluses, could dampen eurozone GDP growth but may have a mitigated impact, as exports to the US account for 3.3% of GDP. Domestic demand, nominal wage growth, and inflation nearing target levels could offset some external pressures. Growth fears in early 2025 could weigh on EUR/USD, but less-aggressive ECB cuts and potential Fed easing may support a recovery in the pair later in the year.

Sterling recovered after dipping below $1.25 for the first time in six months, having started its decline following the US election when it was trading above $1.30. A sharper-than-expected drop in October retail sales (-0.9% vs. -0.4% expected) and a weak flash November PMI, which saw the composite return to contraction territory, pushed sterling to $1.2490 before rebounding to $1.2750 by the month's end, aided by a broader pullback in the US dollar. While the UK may face less direct impact from US tariffs, its exposure to the eurozone and other trading partners suggests indirect effects from US trade policies. However, with two-thirds of UK exports to the US being services and goods exports representing only 2.0% of UK GDP, the impact is likely to be limited. The Bank of England meets on December 19, with rate cut expectations factored into market pricing, which should help stabilize sterling's performance.

In November, the Japanese yen emerged as the top-performing G10 currency, slightly outperforming the robust US dollar. This performance was influenced by expectations of a Bank of Japan (BOJ) rate hike, with the yen reaching a six-week high against the dollar. The Japanese economy shows signs of strengthening, with firming price pressures and the BOJ's commitment to normalizing monetary policy. Market expectations indicate a potential 15 basis point rate increase at the BOJ's December 19 meeting. Notably, movements in the US 10-year Treasury yield continue to significantly impact the yen's valuation.

The dollar fell 3.4% against the Chinese yuan in Q3 but has rebounded sharply in Q4. Measures to stabilize China’s property and equity markets and local government finances have yet to fully convince global investors. Adding to uncertainty, China’s new export restrictions on critical materials like tungsten, graphite, and magnesium, along with the threat of new US tariffs, cloud the prospects for economic recovery and the USD/CNY exchange rate. With Trump’s re-election and the GOP controlling Congress, the likelihood of faster and more aggressive tariff implementation looms. A phased 10% tariff on Chinese imports appears likely, but the scale and timing of further measures will heavily influence the outlook for USD/CNY, as tensions in US-China trade relations are expected to persist.

The Reserve Bank of India (RBI) held rates steady at 6.50% in October but shifted its stance to neutral, hinting at potential rate cuts ahead. The Indian rupee has shown relative resilience compared to other Asian currencies, supported by aggressive RBI foreign exchange interventions, even amid the re-election of US President Trump. However, the rupee faces headwinds from both domestic and global factors, including slowing economic growth and the prospect of swift US tariff increases. While the rupee is expected to outperform other Asian currencies in the first half of 2025, it is projected to gradually depreciate, with the USD/INR likely reaching 86.00 by the fourth quarter of 2025. The trajectory will be shaped by global trade policies and evolving domestic economic conditions.

The Australian dollar fell but outperformed most other G10 currencies, demonstrating resilience amid global growth uncertainties following Donald Trump’s election victory. Australia’s economic outlook remains closely tied to China, a primary target of Trump’s tariff policies. While a slowdown in Chinese growth poses indirect risks, expectations that China will boost domestic demand to counter tariffs have supported the Australian dollar and exports. The Australian economy has exceeded expectations, and the Reserve Bank of Australia faces little pressure to ease monetary policy. With US exports making up just 4% of total Australian exports (less than 1% of GDP), Australia’s direct exposure to US trade policies is limited. However, with 37% of exports going to China—accounting for over 7% of GDP—Australia’s reliance on China highlights the importance of how Trump’s policies impact Asia. Despite its resilience, the Australian dollar faces downside risks in the coming quarters.

In November, the New Zealand dollar weakened further as the US dollar strengthened following President Donald Trump's re-election, with markets anticipating escalating trade tensions and widespread tariffs on US imports. Domestically, New Zealand's economy faces challenges, with a potential technical recession looming as third-quarter GDP data may confirm the second recession in two years. The Reserve Bank of New Zealand (RBNZ) has maintained a tight monetary stance, which appears to be constraining growth. In response to these economic conditions, the RBNZ lowered the Official Cash Rate by 50 basis points to 4.25% in November, marking the third reduction in four months, and signaled the possibility of further cuts, including a probable 50 basis point reduction in February. The potential for global growth to be negatively impacted by trade conflicts presents downside risks to the New Zealand dollar, with expectations of further weakness in the first half of 2025 as the RBNZ may implement more cuts than currently anticipated.

The Mexican peso fell by 1.75% against the US dollar for the second consecutive month in November, pressured by political and economic uncertainty. Investors remain cautious about Mexico's new government, whose constitutional reforms raise concerns about long-term investment protections. The peso faced additional challenges following Trump’s re-election, as he threatened a 25% tariff on all imports from Mexico unless action was taken to curb migrant and drug flows. This pushed the dollar to a two-year high of MXN20.83. However, after Mexico's President Sheinbaum pushed back and threatened a tit-for-tat response while noting progress on Trump’s charges, the US president-elect's tone softened, leading to a peso recovery as the dollar pulled back to MXN20.20. Trade tensions, potential tariffs, stricter US border policies, and the Bank of Mexico’s recent rate cuts, with further easing expected, continue to weigh on the peso as North American trade dynamics and domestic monetary policy evolve.